• Table of Contents
    • Abstract
    • Keywords
    • Article
      • 1 Introduction
      • 2 The stationary recursive utility function
      • 3 The time aggregator
      • 4 The risk aggregator
      • 5 Optimization and the Bellman equation
      • 6 Conclusion
      • 7 Further reading
    • See Also
    • Bibliography
    • How to cite this article

recursive preferences

David K. Backus , Bryan R. Routledge , Stanley E. Zin
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Abstract

Recursive preferences characterize the trade-offs between current and future consumption by summarizing the future with a single index, the certainty equivalent of next period's utility. Recursive utility functions are built from two components. A risk aggregator encodes trade-offs across the outcomes of a static gamble and, hence, defines the certainty equivalent of future utility. A time aggregator encodes trade-offs between current consumption and the certainty equivalent of future utility. We suggest functional forms for time and risk aggregators with desirable properties for applications in economics and finance, such as the standard intertemporal consumption/portfolio problem, which we solve using dynamic programming.
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Keywords

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Article

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How to cite this article

Backus, David K., Bryan R. Routledge and Stanley E. Zin. "recursive preferences." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 01 September 2014 <http://www.dictionaryofeconomics.com/article?id=pde2008_R000260> doi:10.1057/9780230226203.1408

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